Unicredit tries to avoid government yoke

September 29, 2009

It is increasingly likely that Unicredit will snub the Italian government and turn to its own investors to bolster its fragile capital base. Even with equity markets improving, and Italy’s largest bank’s own shares having more than doubled from their spring lows, this decision may look expensive. But avoiding the strings of state ownership — and boosting its core equity base — should more than justify the cost.
Unicredit bank had previously been expected to tap the Italian and Austrian governments for a total of 4 billion euros, but some analysts now believe that it could raise as much as 6 billion euros from its own shareholders by issuing shares at a discount of about 30 percent to the current price.
This looks an expensive choice given that Unicredit could accept capital from the Italian government instead. It is offering hybrid convertible bonds with an interest rate of around 8.5 percent in the first four years, though this would increase to 10.5 percent and above thereafter. These “Tremonti bonds”, named after Italy’s finance minister, would only convert into equity if the bank needs the capital.
However, the bonds come with strings attached. For starters, there is no love lost between Giulio Tremonti and Alessandro Profumo, Unicredit’s chief executive.
The notion of state intervention is also particularly difficult for Unicredit, which has spent much of the past decade attempting to turn itself into a pan-European institution.
Rome would impose an ethics code that would limit executive pay and would restrict dividends. It would also require Unicredit to lend to particular categories of customers. Vienna, meanwhile, would insist on being able to take a stake in Unicredit’s Bank Austria subsidiary in return for its support.
Restrictions on dividends would be tricky for Unicredit. The six big charitable foundations that make up 15 percent of the bank’s shareholder base rely on dividends for their regional charitable work. They were not happy when Unicredit paid its 2008 dividend in scrip form, and are reported to have told Profumo that they would back a rights issue only on condition that cash dividends were resumed.
Conditions on lending would appear to be less objectionable. However, Rome’s strictures go far beyond those demanded by other governments that have bailed out their banks, like Britain’s.
When Banca Popolare di Milano agreed to take 500 million euros-worth of Tremonti bonds, it signed up to a series of lending conditions with regard to small and medium-sized businesses; tourism and industrial companies in Lombardy, and vulnerable customers like those with newborns and the newly-unemployed.
Unicredit has already benefited from the promise of government support and taxpayers may feel somewhat shortchanged that they will get nothing in return. However, as Britain’s Barclays has shown since it wriggled free of government support in the spring, the market rewards those who snub the state.

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